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strategy and business
 / Summer 2013 / Issue 71(originally published by Booz & Company)


Research Perspectives on the New CEO

The companies that hired CEOs from a different industry also enjoyed other performance gains. On average, they paid more dividends to shareholders, engaged in higher capital spending, and demonstrated better operating performance, as measured through profitability and Tobin’s Q (the ratio of a company’s market value to the total value of its assets).

The authors also looked for correlations to explain why companies made the hiring choices they did. The greater the number of similar firms there were in the hiring company’s industry, the more likely it was that the new CEO would be hired from that sector. By contrast, firms that had smaller boards, more independent directors, or more members who were also sitting on other major company boards were more likely to appoint a CEO from another industry.

Paying More for Generalists

The Suffolk University study also found that CEOs brought in from another sector received more compensation than newcomers from the same sector. That finding jibes with another recent paper, “Generalists versus Specialists: Lifetime Work Experience and CEO Pay,” by Cláudia Custódio of Arizona State University, Miguel A. Ferreira of the Nova School of Business and Economics, and Pedro Matos of the University of Virginia. This study finds that CEOs who have accumulated more general managerial skills during their career have been increasingly better paid during the past two decades than their counterparts who specialized in one industry or company.

The authors assembled a database of almost 4,500 resumes from CEOs at firms in the Standard & Poor’s 1500 list from 1993 through 2007. This collection of resumes listed some 32,500 previous jobs. After indexing these documents, the researchers created a list of general skills that could be accumulated and transferred across companies and industries.

After controlling for many characteristics of firms and executives—including CEO age, tenure, and educational background—the authors found that generalists earned a significant pay premium compared with specialists. CEOs with more general abilities than the sample’s median received a premium of 19 percent in annual pay, on average, or almost US$1 million in extra compensation. Pay increased the most when the generalist CEO was also an industry outsider replacing an industry insider.

Pay was also higher than the median for generalist CEOs who were hired to oversee complicated projects such as restructuring or acquisitions. This implies that the labor market rewards CEOs who can guide their firm through a challenging business landscape. Indeed, the premium for generalists was higher at firms that were distressed, undergoing intense M&A activity, or operating in turbulent industries.

Although the premium for generalists was prevalent across sectors, it was higher in segments that had gone through regulatory and technological shocks in the past two decades, the authors also found. As an example, they cited the telecom industry, which has experienced disruptive leaps in innovation, shifting consumer trends, and legislation that has reshaped business models.

The researchers point to the late Michael H. Jordan as a model of the versatility and increasing value of high-powered generalists. Jordan was the CEO of PepsiCo from 1986 to 1990; of Westinghouse Electric from 1993 to 1998, overseeing the acquisition of the CBS television and radio network; and of Electronic Data Systems (EDS) from 2003 to 2007. His chief executive experience thus encompassed consumer nondurables, electronics and industrial supplies, broadcasting, and business services. While he headed EDS, Jordan was paid $10 million more a year than the average single-industry CEO was.

The Shadow Emperor Effect

Another recent paper offers worrisome findings for any new chief executive whose predecessor is looking over his or her shoulder. The paper, “When the Former CEO Stays on as Board Chair: Effects on Successor Discretion, Strategic Change, and Performance,” by Timothy J. Quigley of Lehigh University and Donald C. Hambrick of Pennsylvania State University, finds evidence that an ex-CEO who stays on as chairman can cramp his or her successor’s style and strategic initiatives—to the firm’s detriment.

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  1. Cláudia Custódio, Miguel A. Ferreira, and Pedro Matos, “Generalists versus Specialists: Lifetime Work Experience and CEO Pay,” Darden School of Business Working Paper No. 2116525, July 2012. The paper will also appear in a forthcoming issue of the Journal of Financial Economics.
  2. Abu M. Jalal and Alexandros P. Prezas, “Outsider CEO Succession and Firm Performance” (subscription or fee required), Journal of Economics and Business, vol. 64, no. 6, Nov.–Dec. 2012.
  3. Timothy J. Quigley and Donald C. Hambrick, “When the Former CEO Stays on as Board Chair: Effects on Successor Discretion, Strategic Change, and Performance” (subscription or fee required), Strategic Management Journal, vol. 33, no. 7, July 2012.
  4. For more thought leadership on this topic, see the s+b website at:
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